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Aging and Pension Reform in a Two-Region World: The Role of Human Capital

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  • Vogel, Edgar

    ()

  • Ludwig, Alexander

    ()

  • Börsch-Supan, Axel

    ()
    (Munich Center for the Economics of Aging (MEA))

Abstract

Projected demographic changes in industrialized countries will reduce the share of the workingage population. Analyses based on standard OLG models predict that these changes will increase the capital-labor ratio. Hence, rates of return to capital decrease and wages increase, which has adverse welfare consequences for current middle aged asset rich agents. This paper addresses two important endogenous adjustments channels to dampen these detrimental effects of demographic change: investing abroad and endogenous human capital formation. Our quantitative finding is that openness has a relatively mild effect. In contrast, endogenous human capital formation in combination with profound changes in pension policy – fixing contribution rates and increases in the retirement age – have strong effects. Maximum welfare losses of demographic change for households alive in 2010 decrease from 6.5% to 3.6% when human capital endogenously adjusts and when the statutory retirement age is indexed to life expectancy.

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Bibliographic Info

Paper provided by Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy in its series MEA discussion paper series with number 11246.

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Date of creation: 24 Sep 2011
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Handle: RePEc:mea:meawpa:11246

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  1. Alexander Ludwig & Dirk Krüger & Axel Börsch-Supan, 2009. "Demographic Change, Relative Factor Prices, International Capital Flows, and Their Differential Effects on the Welfare of Generations," NBER Chapters, in: Social Security Policy in a Changing Environment, pages 385-414 National Bureau of Economic Research, Inc.
  2. Axel Boersch-Supan & Alexander Ludwig, 2005. "Aging, pension reform, and capital flows: A multi-country simulation model," Computing in Economics and Finance 2005 123, Society for Computational Economics.
  3. Fatih Guvenen & Burhanettin Kuruscu, 2010. "A Quantitative Analysis of the Evolution of the U.S. Wage Distribution, 1970-2000," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 227-276 National Bureau of Economic Research, Inc.
  4. Perroni, Carlo, 1995. "Assessing the Dynamic Efficiency Gains of Tax Reform When Human Capital Is Endogenous," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 907-25, November.
  5. Morten I. Lau & Panu Poutvaara, 2001. "Social Security Incentives and Human Capital Investment," CESifo Working Paper Series 438, CESifo Group Munich.
  6. Attanasio Orazio P. & Gianluca Violante, 1999. "Global Demographic Trends and Social Security Reform," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  7. Alexander Ludwig & Thomas Schelkle & Edgar Vogel, 2011. "Online Appendix to "Demographic Change, Human Capital and Welfare"," Technical Appendices 08-168, Review of Economic Dynamics.
  8. Boucekkine, Raouf & de la Croix, David & Licandro, Omar, 2000. "Vintage Human Capital, Demographic Trends and Endogenous Growth," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000007, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  9. Martin Floden & David Domeij, 2004. "Population Aging and International Capital Flows," 2004 Meeting Papers 490, Society for Economic Dynamics.
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  11. Ludwig, Alexander, 2007. "The Gauss-Seidel-quasi-Newton method: A hybrid algorithm for solving dynamic economic models," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1610-1632, May.
  12. Dupor, Bill, et al, 1996. "Some Effects of Taxes on Schooling and Training," American Economic Review, American Economic Association, vol. 86(2), pages 340-46, May.
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  14. Lord, William, 1989. "The transition from payroll to consumption receipts with endogenous human capital," Journal of Public Economics, Elsevier, vol. 38(1), pages 53-73, February.
  15. Krueger, Dirk & Ludwig, Alexander, 2007. "On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 49-87, January.
  16. Kjetil Storesletten, 2000. "Sustaining Fiscal Policy through Immigration," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 300-323, April.
  17. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
  18. Alexander Ludwig & Edgar Vogel, 2010. "Mortality, fertility, education and capital accumulation in a simple OLG economy," Journal of Population Economics, Springer, vol. 23(2), pages 703-735, March.
  19. Maria Arrazola & Jose de Hevia, 2004. "More on the estimation of the human capital depreciation rate," Applied Economics Letters, Taylor & Francis Journals, vol. 11(3), pages 145-148.
  20. Kalemli-Ozcan, Sebnem & Ryder, Harl E. & Weil, David N., 2000. "Mortality decline, human capital investment, and economic growth," Journal of Development Economics, Elsevier, vol. 62(1), pages 1-23, June.
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  22. HUANG, HE & IMROHOROG[caron]LU, SELAHATTIN & SARGENT, THOMAS J., 1997. "Two Computations To Fund Social Security," Macroeconomic Dynamics, Cambridge University Press, vol. 1(01), pages 7-44, January.
  23. Ludwig, Alexander & Schelkle, Thomas & Vogel, Edgar, 2010. "Demographic Change, Human Capital and Welfare," MEA discussion paper series 10196, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  24. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April.
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